ICE Futures Canada canola contracts surged higher during the week ended May 27, hitting their strongest levels in months as persistent weather issues in the Prairies, along with activity in outside markets, provided support. Without any fresh weather news, canola could be running out of steam to the upside, but any profit-taking setbacks should be limited by the production uncertainty heading through the growing season.
Moisture-related seeding delays in the eastern Prairies, together with frost fears in northern Saskatchewan and dryness slowing emergence in Alberta, have all combined to create the “weather concerns” propping up canola recently. The uncertainty of seeded acres, and of yields for what does make it into the ground, should remain a supportive influence going forward, but traders generally say
it will take a fresh scare to trigger a sustained move higher. Attention will also soon start to turn away from those unseeded acres to those that are in the ground and looking in reasonably good shape.
The production uncertainty is causing exporters and domestic crushers to book some coverage through the futures, while bullish technical signals encourage fund buying. From a chart perspective, canola did run into some technical resistance during the week and it will likely take a push above the psychological $600-per-tonne level in both the old-crop July contract and the new-crop November to keep the funds on the “buy” side.
The November contract did pass that level to end the week, and it could be seen as a support level going forward. However, at the same time, values may start looking a little overbought if new weather concerns don’t come forward.
It is also important to keep in mind that the Canadian canola market doesn’t operate in a vacuum reacting solely to its own supply/ demand fundamentals. It responds to many outside factors as well, including foreign exchange rates, the price of crude oil and activity in the U.S. soybean market, among others. One such outside factor garnering a great deal of attention recently is the European rapeseed market.
Rapeseed futures in the European Union have climbed to record-setting highs over the past month, as drought fears in France and Germany have market participants worried about yield reductions. The official U.S. Department of Agriculture estimate on European rapeseed production of 20 million tonnes is only down slightly from the 20.7 million tonnes grown the previous year. However, private forecasters have downgraded their estimates over the past month, with many now anticipating a production number closer to 18.5 million or even lower.
GMO issues limit how much canola Canada itself can move into the EU, but its supply tightness will have far-reaching ripple effects in the broader oilseed markets. From a Canadian perspective, tight rapeseed supplies in Europe will reduce the potential for competitive exports from the region. In addition, the EU could draw in more canola from Australia, which would in turn reduce the competition for Canadian canola in other markets.
The large biodiesel industry is one of the main customers for rapeseed in the EU, with some of the production also used to produce edible oils.
GOT MILLING WHEAT?
The European wheat crop is also being hurt by drought conditions, and accounted for some of the strength in the U.S. wheat futures during the week. While world wheat supplies are far from tight, the stocks of high-quality milling wheat are dwindling. Seeding delays for spring wheat crops in the northern U.S. and Canada were also behind some of the strength in the U.S. wheat market. Weather issues should remain a dominant factor keeping values supported, at least until traders get a better handle on production ideas.
For soybeans and corn, the nearby July contracts moved down with profit-taking during the week, but new-crop values moved up amid the new-crop production uncertainty. The seeding pace for both crops is behind normal, and the later seeding dates mean fields will be at a greater risk of frost damage and yield reductions in the fall.
Phil Franz-Warkentin and Dwayne Klassen write for Commodity News Service Canada, a Winnipeg company specializing in grain and commodity market reporting.